Gold doesn’t blink: What trillions in US debt mean for safe-haven assets

More recently, consumer confidence and business investment intentions have been affected by economic and trade policy uncertainty.

This in turn has triggered a reallocation of global capital out of the US with global investors seeking out alternative safe-haven assets to US Treasuries.

The consequences have been a weaker dollar, rising gold prices, and US bond yields widening versus other high-grade sovereigns, e.g. Germany (Chart 3).

Chart 3: “Liberation day”!

Gold, DXY and US-German 10yr yield spread

More broadly, we believe fiscal concerns have been one of the factors supporting the gold market. (Chart 4). For example, the difference between the yield on a US government bond and the fixed rate of an interest rate swap has been pushed up – a potential sign of fiscal concerns (3).

In other words, we are witnessing investors' inability or unwillingness to absorb debt issuance or sales by other bond holders at prevailing prices, in turn exerting upward pressure on bond yields, pushing the US Treasury swap spread higher.

Chart 4: Gold rising alongside US fiscal concerns

US 10yr Treasury swap spread and gold (USD/oz)*

Our simplified analysis points out that the differential between US Treasuries and swap rates, which we believe is at least partly linked to US fiscal concerns, is statistically significant in explaining movements in the gold price (Table 1).

In practical terms, when fiscal concerns increase – reflecting worries over US government debt sustainability or deficits – investors may seek the relative safety of gold, driving its price higher (4).

Table 1: As US fiscal stress has increased, investors have sought out gold

Regression of gold returns on fiscal stress, DXY index and 10yr real yields*

The US’s precarious fiscal position

The gold market is likely to continue to be supported by US fiscal issues as the bond market will remain sensitive to US debt sustainability considerations.

Indeed, the last two decades of relaxed fiscal policies (Charts 5 & 6) and shifts in the demand structure have now put the US in a precarious position, and one which could be exacerbated by the passage of the ‘Big Beautiful Bill’.

Chart 5: Fiscal loosening started in 2001

US debt to GDP, US budget to GDP, and respective forecasts from the CBO*

Chart 6: Is the only way up?

US govt interest payments vs. 10yr term premia*

Demand for Treasuries from the Fed and foreign official institutions, which are least return sensitive, is falling (Chart 7).

By contrast, foreign private investors are now the largest non-official holders of Treasuries. They are also likely to be the most price-sensitive category of investors, given their global mandates and tendency to compare Treasuries with government bonds across multiple jurisdictions.

Chart 7: Treasury demand is becoming more price sensitive

Treasury securities held by official institutions and private foreigners* 

Full-blown fiscal crisis unlikely and unnecessary for gold support

All of this does not mean a full-blown crisis is imminent. Such a crisis would require a short-term trigger – such as a debt-ceiling miscalculation resulting in a technical default – that exacerbates the existing long-term destabilising trends.

Rather, the more likely outcome is a series of rolling mini-crises as political objectives and bond market expectations collide. In fact, when it comes to fiscal sustainability, perceptions matter as much as policy.

If leaders give the impression that their commitment to long-term fiscal discipline is weakening – or that they are determined to force through policies that will weaken the fiscal position – then the reaction in bond markets is usually quick and severe.

But this is generally short-lived as the government backs down in the face of market pressure and central banks can also step in to prevent yields rising too quickly (and they will always do so if those moves in yields threaten financial stability).

As fiscal concerns come to the fore, gold – an alternative safe-haven asset – should remain supported.

Conclusion

The interest rate environment and geopolitical tensions undoubtedly play a significant role in driving the gold price but they are not the sole factors. Fiscal concerns have also had a say. And while there is a strong belief that the US Treasury market will never lose its safe-haven status, a major crisis, while unlikely, is not impossible.

The more likely outcome is a series of rolling mini-crises as highly indebted sovereigns like the US are confronted with market-imposed limits on fiscal largesse. This uncertainty and resulting market volatility are likely to give additional support to the gold market.